Housebuilder merger creates £5bn giant

Taylor Woodrow and George Wimpey are this week expected to announce a £5bn merger, creating Britain's biggest housebuilder and firing the new group into the FTSE 100 index.

The deal will immediately eclipse last month's £2.2 billion takeover of Wilson Bowden by Barratt Developments, which at the time took the number one housebuilder spot from Persimmon.

Taylor Woodrow and Wimpey's all-share merger of equals is expected to create millions of pounds of cost savings and boost its landbank. The alliance of Taylor Woodrow and Wimpey, number three and four UK housebuilders, will leapfrog their rivals.

The companies are the only British building groups to have UK and US operations. More than 50% of Taylor Woodrow's business is in America.

After announcing strong results this month, Wimpey chief executive Peter Redfern, at 36 the youngest boss of a major housebuilder, said he planned to spend more than £1 billion on land to replenish the company's housing stock.

Wimpey lost out in the auction for Wilson Bowden, prompting analysts to speculate about further consolidation in the sector.

The continuing rise in house prices, with increased demand but a squeeze on the supply, means housebuilders with strong landbanks are sought after by investors.

Wimpey's low debt levels mean it is well placed to buy land. Profits last year grew by 1% to £370.9m, while turnover was ahead five per cent to £3.15bn. House completions in the UK rose by 13% to 13,616.

In contrast, Taylor Woodrow has for years consistently underperformed its peers - UK profit margins are roughly half those of rivals.

In February, new chief executive Ian Smith suggested he was on the acquisition trail and said the company would undertake a grassroots review of its underperforming UK division.

The company announced a £5 million fall in annual profits to £406m -in February, despite sales rising from £3.56bn to £3.68bn.

Shares in Taylor Woodrow closed last week at 420½p to value the group at £2.45bn, while Wimpey's shares ended at a record high of 635p, valuing it at £2.55bn.

The UK's housing boom has been fuelled by a scarcity of building land, partly caused by lengthy and complex-planning applications. The result has been a steady stream of mergers, with 32 building companies coming down to ten in the past decade alone.

Larger players are better equipped to develop the land that is trickling on to the market. Taylor Woodrow is being advised by UBS and George Wimpey by JP Morgan Cazenove.